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Near Record Vacancy Rates Weigh on Home Prices

Wednesday, 25 May 2011 21:22

Nearly all economics reporters missed the housing bubble on the way up. They still seem determined to ignore it even after its collapse wrecked the economy.

The Wall Street Journal has a piece that emphasizes the effect that foreclosures are having on house prices. While foreclosures are lowering house prices, the more fundamental issue is that we have enormous excess supply. The country still has near record housing vacancy rates, although the level is down slightly from the peaks hit in 2009-2010.

This extraordinary vacancy rate puts downward pressure on house prices, since it means that there is excess supply of housing. (Those who took intro econ might recall the concepts of "supply" and "demand.") One of the predictable results of excess supply and falling prices is a rise in foreclosures, since falling house prices will put many people underwater in their mortgage. As a result of having zero equity, it is harder for people to pay their mortgage (they can't borrow against equity) and they have less reason to do so.

Anyhow, the key part of this story is the excess supply which was the result of the massive overbuilding of the last decade. It is reasonable to expect that prices will have to fall at least back to their pre-bubble level (@10 percent more) in order to bring the market back into balance.

Comments (4)Add Comment
new era hats
written by King, May 25, 2011 10:16
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written by foosion, May 26, 2011 4:38
Falling prices are usually considered a good thing for consumers. Housing seems much more a consumption good than an investment good.

Some existing owners have borrowed too much. Some purchasers will not have to borrow as much. Is it a zero sum game?

At this point, why are falling prices a bad thing? Lack of construction spending and therefore employment?
written by skeptonomist, May 26, 2011 8:09
The matter of foreclosures should have been cleared up long ago one way or the other. No one in authority - the Fed, Treasury, Congress - has really been constructive on this. As Dean has said, the house-buying credits have mostly just strung things out.

If you still have a job and it is necessary to borrow against equity to make mortage payments, you probably should not have bought the house in the first place. Many of the people in this situation must have been speculators. Too bad the Fed made boosting housing, which relied in part on house-flipping as well as the shenanigans in bundling mortgages, its main means of countering the recession of 2001.
written by urban legend, May 27, 2011 5:09
Doesn't this undermine Brad Delong's apparent belief -- it seems to be model-driven more than empirical -- that sometime in the meaningful future we will get back to and go beyond the pre-2007 construction expenditure trend line? That seemed to be unnaturally inflated over the past 30 years or so anyway -- in both residential and commercial properties -- but in any case a big backlog of vacancies would mean it will be some time before there is much demand for new construction. The only other way to get there would seem to be public infrastructure building.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.